Building Blocks: The Idea Blockchains are Built On

Remember, one must fail in order to learn. Humans have failed again and again in many ways up until now, just as we have learned and succeeded in many ways. Granted, the scope of human history is a tiny fraction of cosmic time, but it is our time and we must choose what we do with it, both individually and as a collective. Not to sound too dramatic, but this (relative) new distributed technology is on the forefront of innovation and is poised to change the very way we connect with one another and exchange value. Blockchains bring together the interconnectivity of the web with fine-tuned economic protocols that evolved slowly into the World of Wealth we have today.

One example of the human learning curve that creates the basis for exciting new blockchain technology and the applications that run on them is what Daniel Jeffries describes as “history’s sexiest subject”: accounting. To understand how blockchains and cryptocurrencies can spark the Ember to set the Old World Economy afire we must first understand how the sexiest subject in history runs through context and background straight into another interesting subject – cryptography – at the crossroads of the information age.

First things first, let’s bring it back to roots. With the advent of agriculture as a replacement for hunting and gathering, a curious thing happened in the human experiment: farmers produced a surplus. Surplus crops could then be traded with other early, emerging civilizations. In Jarod Diamond’s book Guns, Germs, and Steel he argues that surplus agricultural production required more complex societies as it takes more organization and cooperation to handle early trade endeavors and infrastructure projects, not to mention the wonders of the ancient world. The Seven Wonders wouldn’t exist without centralized agriculture and certainly not without accounting. This is well before any major technological advances in transportation, so most trade was done overland, except in outlying exceptions such as Southeast Asia. The complex agricultural society gave rise to what has been dubbed “single-entry accounting,” where one centralized power records transactions to monitor the money supply or bartered goods. This required a great deal of trust, for if the King or Warlord’s accountant simply erased a transaction there would be no way to prove the money or goods existed at all. Single entry accounting, as far as we know, was invented by Sumerians some 5000 years ago. The same civilization that gave the world it’s first written epic also set forces in motion for the globalized economy we have today.

As humanity progressed, so did technology. The tools we used became more complex, allowing us to build more complex systems of transportation. Enter roads, shipping routes, and the next benchmark in our sexy little story: double-entry accounting. This is where the buyer and the seller both record transactions, delegating the trust between those engaged in trading rather than a centralized state or cartel. Although, the people holding the money and recording the transactions often involved themselves in government. While a massive improvement on single-entry, double entry still struggled with centralization of power because collusion between traders could hide fraud and foul play in accounting. A Franciscan friar and collaborator of Leonardo Da Vinci is credited with codifying double-entry accounting in 1494, in the heat of the Venetian trade metropolis; However, the first use of it can be debated.

Double-entry, like single-entry, requires citizens of the economy to put trust in business owners and state institutions. Essentially the same types of organizations that caused the 2008 banking crisis and the plethora of crashes – both past and future – just like it will continue if something is not done to change the sources of economic power.

Double-entry accounting essentially ruled the world until…now. Joint-stock companies, corporations, and businesses of all kinds have been using this system since the 11th or 12th centuries at the earliest. As we can clearly see, as global trade and the record of transactions becomes more widespread and complicated (and now, digital) the threats of collusion or “attacking the head of the snake” make these institutions built around double-entry accounting vulnerable. Even the smartest bankers in the room at Enron in 2001 couldn’t avoid the fiasco and neither could the sub-prime lenders in 2008. Major discrepancies such as these do not happen with honest accounting. So who can we trust if we can’t trust our businesses, governments and corporations with the money of the world without corruption then how to we assign trust? Who should be in charge? The short answer: no one.

In 1989, the world was discovering many perks of the digital age which have evolved rapidly over the last 28 years. Even back then, double-entry systems struggled with integrity. A professor named Yuji Ijiri published Momentum Accounting & Triple-Entry Bookkeeping, and, as exciting as it sounds, it mostly fell on deaf ears. The reason, in short, was that the world lacked the technology to make the dream a reality. Now that we have the power of encryption, processing power, and a platform to execute such a system, Ijiri’s idea – along with many others – of a trusted market looks more like a reality. Ian Grigg’s 2005 paper, “Triple Entry Accounting,” although not based on Ijiri’s work, had a particular influence on the development of blockchain technology. With the new age of Internet and Information, data flows like never before; blockchains and the triple-entry accounting they use puts trusted protocols on the flow of data. This data previously had to be protected, like the Post Office is supposed to protect and deliver your mail. To solve the privacy problem of digital information, many different cryptographers from all over developed computer encryption which is used today to encrypt emails and other information on the digital highway.

With cryptography and processing power beyond Professor Ijiri’s wildest dreams, the world now possesses the technology to implement triple-entry accounting. Like double-entry, the buyers and sellers record transactions. The third record of the transaction is recorded automatically, and that information is distributed and transparent (accessible) to EVERYONE in the network. No more cheating. No more skimming off the top. All that remains is to set the rules. Triple-entry accounting eliminates trust by eliminating the need for it and remains the primary reason blockchain and cryptocurrencies like Bitcoin and Ethereum stand at the crest of a new age in commerce.

So for those of you searching for a simple answer to the question of what exactly is the hoopla about blockchains and crypto. Triple-entry accounting. That’s all folks, for today. In the coming weeks I hope to explore some more specific nuances of information technology’s new experiment and its possible uses, which at the current moment don’t seem to have a limit. Until then, I am

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